Climate policy not direct or active, experts say

Grattan Institute policy director Tony Wood: “It leaves industry both confused and frustrated. If the government is giving away $2.55 billion over five years of course someone is going to turn up but the question is, is the right person going to turn up.”
AFR

The name the government chose for its fledgling climate policy back in 2010, Direct Action, was a punchy title well suited to the election campaign in which it was formed.

But four years on, with the Coalition now in power and with big business and environmentalists alike still in the dark about key features, the policy looks neither direct nor particularly active.

It was always going to be difficult. As anyone who has been watching ­Canberra for the last four years would know, climate policy has become a toxic issue where rational discussion seems impossible.

In that context Environment Minister
Greg Hunt
has bent over backwards to consult as much as possible with every stakeholder involved, with the result that the policy development process has moved at a glacial place with a somewhat ambling direction.

The policy’s white paper, which was released last week – late in the afternoon on the day before a public holiday – delivered more lingering questions than answers.

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Add to that the need for the government to negotiate on the policy to get it past Palmer United Party senators and other independents in the Senate from July 1, lest it face a High Court challenge, and you get even more uncertainty.

“It leaves industry both confused and frustrated. If the government is giving away $2.55 billion over four years of course someone is going to turn up but the question is, is the right person going to turn up?" says Grattan Institute policy director Tony Wood. “The question was always going to be in the detail."

Environmental groups have been most disappointed with the lack of clarity about how penalties might be applied to the country’s 130 largest emitters if, in Hunt’s words, they “go rogue". Legislation to set that up will not be introduced until July 2015.

Penalties unspecified

When pressed about this at last week’s press conference Hunt was unforthcoming, hinting only at unspecified “discussion or activity" as a form of penalty. With $2.55 billion on the line and no stick, you would imagine even the government bean counters would be nervous at that prospect.

Danny Price, the economic consultant who wrote the policy proposal for
Malcolm Turnbull
on which direct action is based, picks this out as a key disappointment of the white paper, though he’s supportive of it in general.

“It’s a hugely controversial aspect of the scheme and my guess is the government wants to consult more widely on that before implementing that really critical part of the scheme. I can see that point of view but I would have liked to have seen more detail about it and I would have liked to have seen a resolution of it," Price tells The Australian Financial Review.

“The effect of it is that people will be very uncertain in terms of how they operate and what they need to do between now and July 1, 2015."

Other key concerns held by business have not been put to rest by the white paper. One is the lengths of contracts they will have to enter into in order to get a slice of the $2.55 billion Emissions Reduction Fund, which is the centrepiece of direct action.

The government has set them at five years, which business says is too short a time scale for any significant or long-lasting projects to be implemented. The government has promised to conduct market testing ahead of the first auction, in order to see whether this will be prohibitive, but this leaves business with a short amount of time to re-jig bids if the terms are suddenly changed.

Privately, business groups are highly sceptical that, if the five-year terms are kept, industry will be very interested in the fund at all.

‘A policy for unicorns’

“It’s a policy for unicorns," one ­anonymous source said.

Price is confident the government will recognise the problem and extend the terms. “There are going to be some projects where five years is just fine, and there will be some projects where five years are not any good. I think in the market testing they’ll find where the five-year time scale just won’t work for them," he says.

Another aspect which business groups have focused on is whether or not they will have access to international carbon credits if they need to top up their emissions reductions at the end of their contract. If businesses fail to deliver on their promised emissions reductions, they will not be paid by the government, so this is a crucial issue.

The rationale is that, with Australian Carbon Credit Units miles more ­expensive than their international counterparts, it will be too expensive for businesses to cover the risk that they end up short in their delivery of reductions.

Although the white paper appears to rule out international access, this is one of the areas where independent Senator
Nick Xenophon
wants to see a change in the policy, and where the government is apparently willing to negotiate.

Whether direct action will actually be effective in delivering the reduction in carbon emissions the government has promised under international agreements – 5 per cent below 2000 ­levels by 2020 – is unfortunately not the biggest question.

Hunt is extremely confident it will, while every other stakeholder is equally confident that it won’t.

Funding worries

The bigger issue is what will happen if it becomes clear there will be a significant national shortfall in meeting the 2020 target once the $2.55 billion funding over four years comes to an end.

The government could well abandon the target, though that would be politically unpalatable.

It could extend the funding allocated to the Emissions Reduction Fund – in a report released on Thursday, the ­Climate Institute estimates this would cost up to $24 billion by 2020 if lost carbon tax revenue is taken into account.

It could also purchase international credits to make up the shortfall, which the Climate Institute estimates would cost $160 million.

Or it could – which is what businesses most fear – take a sudden turn toward more punitive measures on emitters in a bid to make the target.

On both short- and long-term measures, certainty in climate policy remains elusive.